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When San Jose, Calif.-based Bay Microsystems faced a 9 percent price
increase on the health plan it provided for its 31 employees
in 2012, human-resources manager Claudia Amendt didn’t go
shopping around for a cheaper plan. Instead the company, which
has provided health coverage for most of its 14-year
history, switched to self-insurance and opted to pay the
healthcare costs of all its employees directly, rather than
offloading that risk to a traditional managed-care plan. As a
result, Amendt says, Bay’s health-insurance premiums actually
decreased by 10 percent. “Insurance is one of those costs that
just keeps going up and up,” Amendt says. “At some point, you
have to get creative.”

The July 2 revelation that companies with over
50 full-time employees would have an extra year to comply with
the Affordable Care Act, otherwise known as Obamacare, was
welcome news to small business owners, but as the law comes
into full force in 2015, no doubt many more small companies
will consider taking their health coverage in-house.
Self-insuring, traditionally most popular with companies of
5,000 or more employees, is moving down market, as small
companies face the prospect of their costs increasing under
health reform. According to Kaiser Family Foundation, 15
percent of covered employees working for firms with fewer than
200 employees were covered by self-insured plans in 2012, up
from 10 percent in 2004.

Self-insured plans will be exempt from some of the more pricey
requirements under the ACA, such as the need to provide
mental-health benefits, and to
adhere to pricing rules that will cause the costs of insuring
younger workers to rise. Most self-insured policies are not
subject to state insurance mandates, so the same plan can be
offered to employees in different states. Demand for
self-insurance is so strong that UnitedHealthcare began offering
the option to companies with as few as 10 employees this year.
The previous cut-off was 100 employees, according to an e-mail
from a UnitedHealthcare spokesperson.

Self-insurance is also referred to as “self-funded” insurance,
but either way, it’s a bit of a misnomer. Even if you choose to
self-fund your health plan, day-to-day administrative tasks such
as collecting co-pays and premiums, and paying claims, will be
handled by a benefits provider or an insurer such as United or
Cigna. And you won’t truly be taking on 100 percent of the risk,
because self-funded plans for small companies are sold alongside
“stop-loss” insurance policies, which protect them against large
claims from unexpected events such as car accidents or cancer
diagnoses.

So how do you decide whether self-insurance is a good option for
your company? If your workforce is made up of healthy
twenty-somethings, you might assume your risk will be minimal,
but that wouldn’t be smart, says Samuel Fleet, president of
AmWINS Group Benefits in Warwick, R.I. He recommends that all
small companies distribute health-risk assessment
forms—questionnaires that ask employees to report (anonymously)
their health histories, family patterns of disease, and lifestyle
choices such as smoking. “Then you can hand that to a third-party
underwriter and ask, ‘Does it make sense for me to consider
self-insurance?’” Fleet says.

Julie McCarter, vice president of product for Cigna's Select
Segment, which serves small companies, says understanding your
risk is only the first step. When you self-insure, you receive
all the information about how your employees are using the
benefits, what claims they’re making, and other information that
you’ll need to manage the plan going forward. You’ll also be
taking on some legal risk: If, for example, an employee files a
lawsuit over a denied claim, your company will have to pay the
legal fees to defend that, as well as any reimbursement that
results from the decision. “Small employers in the U.S. have a
pretty high turnover rate, about a third a year, so the [current]
makeup of the workforce should not be a leading indicator as to
whether you should self-fund your plan,” McCarter says. “You have
to be willing to take on the responsibility of being more engaged
with your health plan.”

One advantage of self-funding your health plan is you can use
that health-risk information you gather to tailor wellness
programs which in turn could lower your future costs by
decreasing your risk. “If you have 75 employees and 25 smoke, you
can put in a smoking-cessation program,” says Timothy Finnell,
president of Group Benefits in Memphis, Tenn. “Most fully insured
plans don’t provide as much flexibility to customize wellness
programs.”

Insurers such as Cigna have been adding options to make
self-insurance more attractive to small employers, such as
bundling the service with affordable stop-loss insurance, and
assistance designing and promoting wellness programs.

That said, self-insurance isn’t something you should dabble in
for a short time. Finnell tells his clients they can expect to
save between 4 and 10 percent over five years by switching to
self-insurance, provided they can stomach the occasional spate of
high claims and they’re willing to get serious about keeping
their workforce healthy. “It will pay off, but you can have down
years, and it’s troublesome when that happens in the first year,”
he says. “You have to understand that self-funding is a long-term
commitment.”